The independent action group for current and ex Equitable Life policyholders, funded by contributions.

Equitable Members Action Group

Equitable Members Action Group Limited, a company limited by guarantee, number 5471535 registered in the UK

Correspondence: 12/09/2003 - Letter from Paul Braithwaite on behalf of EMAG to all MP's

12 September '03 - Letter from Paul Braithwaite on behalf of EMAG to all MP's

Dear _____________,

The Parliamentary Ombudsman and Equitable Life

The Parliamentary Ombudsman, Ann Abraham, has rejected a sample complaint of maladministration in the prudential regulation of The Equitable Life between 1st January 1999 and 8th December 2000 and she has exonerated the FSA. At a stroke, her report has knocked out over 500 complaints made by MPs on constituents' behalf, many of which related to the period before 1999. EMAG is truly shocked by this mediocre and poorly structured report, which calls into question both the competence in forensic enquiry and the judgement of the Parliamentary Ombudsman and arguably devalues that office's important role in our democracy.

A deplorable volte-face

Regrettably, the Ombudsman has determined that she will under no circumstances look back to the period before 1999 - though her report gives no substantiation for that conclusion. Indeed, her own comments echo those of both Sir Howard Davies and the Baird Report: that "the die was cast" before the inception of the FSA's prudential role in 1999.

Further, this particular conclusion represents a deplorable volte-face on the undertaking repeatedly given to MPs and policyholders by Ms Abraham and her predecessor, Sir Michael Buckley, that the decision on whether to look further would be taken after the Penrose Inquiry report has been published.

"It's beyond my control"

The Ombudsman said, "Because of the limits on my jurisdiction, I could only look at a very small part of what is a much larger and more complex picture." These are weasel words. If the office of the PO was so constrained in what it could and could not investigate - why did it take on the job at all? If, having accepted the job, it was too severely constrained to find in favour of Mr P, how was it possible to exonerate the FSA on the same evidence?"

Prudential Regulation was delegated by the FSA to the Government Actuary's Department (GAD) which, Ms Abrahams maintains, is outside her remit. This appears to be in direct contradiction of Parliament's intent as stated in "The Parliamentary Commissioner Act 1967", which expressly gave the Commissioner oversight over all "the Subordinate Departments of The Treasury" (see Schedule 2 note 6).

EMAG believes that the Ombudsman has been daunted by the prospect of having to undertake a lengthy, detailed - and in parts highly technical - enquiry with the very limited resources at her disposal. The single case investigated was explicitly chosen for convenience to be within the confined 23 month period evidenced by the FSA's own Baird Report. There can be no doubt that going back over the period under The Treasury and the DTI will be a huge task. But shortage of resources should not be a reason to fail in the proper discharge of the Parliamentary Commissioner's duties.

A letter to The Times (2nd July) offered a very different perspective on the actual powers available by someone with a knowledge of regulation, Sir Gordon Downey, the former chairman of both FIMBRA and the PIA:

"It appears that Ms Ann Abraham now takes the view that prudential supervision was essentially a matter of ensuring the solvency of life assurance companies. This is a bizarre interpretation … the legislation at the time provided ample powers to intervene and to place restrictions on what types of business companies could undertake.

Yet, armed with these powers, the regulators: allowed the Equitable to sell unguaranteed policies as low-risk products, without disclosing that prior guaranteed policies existed, representing huge contingent liabilities on the common fund; endorsed the Society's attempt to redress the balance by paying differential bonuses, later ruled illegal; and allowed the society to trade with totally inadequate reserves."

We are told that "Conduct of Business Regulation" also falls outside the PO's remit. It therefore seems odd to have picked as the one single case for investigation the purchase of a new annuity which, according to the Ombudsman, falls primarily under "Conduct of Business". Policyholders have neither the understanding of nor sympathy for the PO's systematic narrowing and fudging of the interpretation of her remit when it comes to overseeing policyholder protection. Investors were entitled to believe the words "Regulated by…" actually meant what they said, as we believe was always Parliament's intention.

Consumers misunderstood and it's Parliament's fault

The Ombudsman's press release stated that: "…the investigation had highlighted a specific issue that she (Ann Abraham) wished to draw to Parliament's attention. That was the apparent mismatch between public expectations of the role of the prudential regulator and what the regulator could reasonably be expected to deliver. It was never envisaged by those who framed the legislation establishing the regulatory regime that it would provide complete protection for all policyholders. The emphasis was on a "light touch" approach to regulation and the avoidance of over-interference in a company's affairs.". This is a breathtaking piece of invention to justify the real vacuum in accountability. It elevates the "light touch" concept - which was a post-rationalisation with no foundation in legislation - whilst simultaneously dumping responsibility on Parliament and blaming consumers for not understanding that it has always been "caveat emptor"!

Was not one of the prime reasons for the formation of the FSA to create more effective policyholder protection in the aftermath of the pensions mis-selling scandal? The FSA, knowing Equitable Life's critical weaknesses, allowed it to continue to write new business both after the Court of Appeal and even after the House of Lords on the assumption that its goodwill could be sold for several billion pounds. In the event, Equitable could not be sold at any price (not even £1) and those that bought policies during the period of the FSA's supervision (like the complainant) lost substantially. The evidence shows that the FSA's over-confident decision was made without taking advice and even without proper consideration. Amazingly, the PO concluded that the FSA was not guilty of maladministration. Based upon the PO's interpretation of the standard of professional skill required of the regulator, 'Regulated by the FSA' will be as worthless as 'Audited by Arthur Anderson'.

Policyholder's Reasonable Expectations

Policyholders' Reasonable Expectations (PRE) is a central issue. Ms Abraham reported it as difficult to define. She confused it merely with solvency and mistakenly addressed it only in the context of Guaranteed Annuity Rates (GARs) - ignoring the fact that three quarters of policyholders did not have GARs but very definitely did have PREs. The Court of Appeal judgement handed down by Lord Justice Brooke on July 25th, 2003 in Ernst & Young versus Equitable Life contains this helpful very comment (para 31):

"PRE is a term of art in the life assurance world. It is a concept to which the managers of with-profits business must have regard. It differs for each company and will be formed as a result of the way in which that company's business has been managed in the past, including consideration of the statements made in promotional materials or regular correspondence with clients."

This confirms that PRE is particular to each provider and predicated on the pattern of communications to its policyholders. Equitable Life was unique in giving every policyholder an annual policy valuation which each was led to believe was meant to be an indication of the individual's asset share. It was indeed the actual sum policyholders did receive on departure, whether contractual or not. No other life company ever included terminal bonuses in this way. If the Ombudsman had asked even a sample of the 539 complainants, or any media or industry experts, a very clear idea of PRE expectations at Equitable Life would have been apparent. The one-sided nature of the "process" adopted by the office of the PO was highly suspect.

New evidence of regulatory failure

EMAG commissioned Chartered Accountants Burgess Hodgson to prepare a forensic accounting study from the reports available to the regulator. Published in late March, it revealed that the assets of Equitable fell woefully short of its liabilities by sums between £1 billion and £2 billion in all but one year in the 1990s. An addendum to that report was published on June 25th (hence it cannot have been considered by the Ombudsman), containing new irrefutable information from Equitable itself that had only been revealed in the Court of Appeal on May 25th. This showed that Burgess Hodgson's findings had been conservative and the real situation was even worse.

This new evidence convinced Dr Ian Gibson MP to sponsor EDM 1337 on June 4th. It called on the PO to broaden immediately her study to embrace possible Treasury mis-regulation throughout the 1990s. But the Ombudsman's report did not refer to this new proof of regulatory failure. The 218 MPs from all parties who signed the motion (or the similarly worded Tory amendment) have been thwarted by the Ombudsman's totally irrational refusal, under any circumstances, to look deeper or to look back.

So strong are our feelings that EMAG is seeking leave for a Judicial Review (JR). But the permitted grounds for a JR are narrow and technical. EMAG believes it is more important that the wider moral and political issues are brought to your attention. We wish to make the case to you that Parliament should reject the Ombudsman's report and call on her to commence a new enquiry, extending back to 1988. To that end we have prepared a further explanatory paper enlarging on our arguments for the select committees on Public Administration and Treasury (available to you on request).

Doesn't Penrose render the Ombudsman's report a sideshow?

Equitable's board would have policyholders believe that the main event is Lord Penrose's Inquiry and that the Ombudsman is "a mere sideshow". This is not so. The Penrose Inquiry was set up as an internal department of the Treasury, which retains control of both content and timing of publication. Penrose cannot pass over files, transcripts, evidence of any kind to any body. The Penrose remit was bland an all-embracing: to look at everything in the society's history for the last 50 years and "learn lessons for the industry". The condition for its collection of information was that the Inquiry be respectful of sensitivity and to honour confidentiality. That undertaking must be primarily for the protection of civil servants. Indeed, the Treasury has previously refused briefing papers and minutes about Equitable to the Treasury select committee in November 2001, hiding behind the Osmotherly rules. The Penrose brief explicitly excluded attributing any liability. By way of contrast, the Ombudsman is meant to be truly independent, reporting as it does to the House, is charged with focussing exclusively on maladministration and can, if appropriate, recommend compensation. With hindsight, Penrose has been incredibly effective in knocking the Equitable Life fiasco "into the long grass" and it has provided an excuse for the Treasury to do nothing for two years.

Trust in Parliament and pensions in peril

If Parliament allows the Ombudsman's Report to go unchallenged it leaves MPs open to the charge that they have contributed to exposing millions of customers of the UK financial services industry to hopelessly inadequate protection. The Equitable Life was the most venerated of pension providers and its With Profits fund was, like most others, utterly opaque. Policyholders were entitled to have confidence that regulators were vigilant in overseeing consumer protection and that the words: "Regulated by…" meant what they implied. To assert, as Ann Abraham does, that all policyholders were aware that Equitable was weak is both insulting to all and simply factually incorrect.

The Equitable Life debacle - and the transparent foot-dragging in resolving the issues that it raises - has already had a profound impact on the public's perception of personal pensions as a safe and sensible way to save. With the crisis in company pensions, this leaves both present and future Chancellors with increasingly serious funding issues for state pensions. It is time for MPs to lance this boil and seek to rebuild lost trust by speaking up for Equitable's policyholders and against this deeply flawed report.

We hope that you personally will fight pro-actively to insist that the Ombudsman's enquiry is started anew, and beyond that for fair consideration in righting the consequences of maladministration extending back over a period of at least a dozen years. There are 50,000 locked-in Equitable With Profits annuitants, most of whom haven't yet realised that their pensions will fall on an average by 50% over the next decade. Their shocking plight deserves your involvement. We venture to suggest that treatment of pensioners is moving towards centre-stage in the next election.

Yours sincerely,

Paul Braithwaite
EMAG general secretary

EMAG endeavours to represent the interests of all classes of Equitable Life's policyholders. In the three years of its existence more than 10,000 present and past policyholders have paid a subscription to join EMAG and support our voice in speaking up for the million plus policyholders who have suffered financially and through anxiety since the collapse of The Equitable Life in December 2000. EMAG believes the failure had little to do with subsequent stock market falls and everything to do with mis-management and mis-regulation for more than a decade. You will see from our website the breadth and depth of EMAG's activities on policyholders behalf at: www.emag.org.uk